The weakening global economic outlook continued to weigh on market sentiment. In contrast, the supply outlook improved on the prospect of higher supply in the coming months, even as signs of disappointing Chinese economic activity and economic weakness clouded much of Europe.

Recent industrial production and retail sale indicators from China added a bearish sentiment to global economic short-term trajectories, which could impact the near-term outlook of crude oil prices.

Other market-changing factors included President Joe Biden recently signing the US Inflation Reduction Act, which cleared the way for $370 billion in energy security and climate change spending over the next decade.

Apparent progress in the Iran talks and mounting recession fears continued to push Brent.

The lower-than-expected US housing starts data also cast a long shadow on the energy market. This is because housing starts are considered a leading indicator of the state of the US economy.

After brief outages, other bearish supply developments included the resumption of production at some of Shell and Chevron’s offshore platforms in the US Gulf of Mexico.

Saudi Arabian Oil Co.’s statement to ramp up its output to 12 million barrels per day if necessary added to the bearish sentiment, even as Libya kept its production steady at 1.2 mbpd following recent outages.

Anticipated higher Libyan production and the return of Kazakhstan’s throughput post maintenance would lift the global crude supply in the short term and reduce market concerns.

Moreover, diesel prices remain seasonably elevated through the fourth quarter 2020 because of the European shortage of natural gas which supports higher prices.

Gas supply constraints in Europe are anticipated to cause a lingering price increase in the few years to come.

With marginal hydrogen supply coming from natural gas feedstock, this will elevate the cost of production of diesel and, to a lesser degree, gasoline, increasing product prices.

Gasoline and middle distillates show softening quarters as there is more supply availability over 2019 net position levels.

There are anticipated periods of natural gas supply disruption, particularly during winter when natural gas usage peaks; higher natural gas prices will support substantial diesel cracks. There is also a downside risk that exists from the global recession.

Since EU sanctions were implemented against Russia, following its invasion of Ukraine on Feb. 24, seaborne crude imports into the EU have witnessed a slight decline from April 2022.

However, the EU faces potential crude import shortages if the upcoming sixth round of sanctions against Russia is fully enforced by Dec. 5, 2022.

There are some exemptions to the crude embargo for several landlocked EU members, such as Hungary, Slovakia and the Czech Republic, which will still import some Russian crude over land through the Druzhba pipeline.

Despite these exemptions, the EU must find replacement sources for 1.2 mbpd of Russian seaborne crude imports and 0.5 mbpd of Northern Druzhba pipeline imports by Dec. 5.

EU’s imports of Russian crude will drop dramatically in December if the EU sanctions are effectively enforced.

The market is now looking somewhat oversold relative to current stock levels and those we are projecting for the rest of the year. Therefore, short of any surprise breakthrough in the Iran nuclear talks, oil prices should soon end their current downward trajectory and instead start to find support.

Given the possibility of a collapse in Iran talks, the potential for more unplanned outages in Libya or hurricane-related supply outages in the US in the next few months, price risk is skewed toward the north.

Diesel delivery complications to inland markets due to low water levels on Germany’s Rhine River could further contract tight diesel balances and exert upward pressure on prices for the same product in parts of Europe.

• Mohammed Al-Shatti is a Kuwaiti oil analyst.